total cost of ownership of corporate car fleet · total cost of ownership of corporate car fleet...
TRANSCRIPT
Sommario
Total Cost of Ownership
of corporate car fleet
Prof. Angelo Paletta
Department of Management
Alma Mater Studiorum - Unibo
Sommario
In many companies the budget of the corporate car fleet
represents a significant proportion of the total costs. In this
circumstance, the fleet manager is one of the managerial roles
that is mainly under pressure to reduce costs.
If the fleet manager is not able to propose cost management
strategies for the company’s fleet car park, he might be involved
in huge discussions about cost reduction policies.
In this sense, the course analyzes the Total Cost of Ownership
(TCO) as a fleet management philosophy that allows to get a
systemic vision of total costs and their reasons (drivers).
Summary
From cost analysis to cost management
• Basic assumptions:
– Globally, the last thirty years have been characterized by a
radical rethinking of the traditional methods of cost accounting
– Direct costing and full costing have revealed serious
shortcomings that are the reasons behind wrong managerial
decisions.
– Traditional methods have lost their importance and many
companies have developed new approaches.
– Why those same companies should not use more sophisticated
methods to manage a significant part of their fleet management
costs?
Principles of process management
Principles of process management
• Homogeneity in organizational tasks (from the technical point of view); people with common and specialized skills
• Processes are sets of activities aimed to obtain an “operational objective” for a business (purchase orders, fulfill orders, product development, supply management…)
• Processes cross the formal or legal boundaries of the productive entities
• Processes are assigned to a “cross-functional coordinator” (process owner)
Total cost of ownership
Total cost of ownership
• It’s a particular application of ABC/
ABM to the supply chain processes
• The TCO is a new approach to the
suppliers relationship management in the
procurement processes:
– From a “low price” system to a “low cost”
system
– Assessment dei fornitori in base al TCO e ad altri indicatori
“Low price” suppliers Vs.
“Low cost”suppliers
• “Low price” suppliers – Spot market – Responsibility of purchase managers on the basis of standard cost variance
• Large quantity purchases: discounts • Purchases from “marginal” suppliers in terms of quality, innovation, service • Purchases from suppliers in countries with lower personnel costs • Purchases from suppliers with low cost structure because of their underinvestment in technology and operating systems • Purchases from suppliers with limited engineering capacity
• “Low cost” suppliers – Optimize the “cost of ownership” (Total cost of ownership) – Long term relationships with a few trusted suppliers - Supplier Assessment, based on Tco and other indexes
The Procurement process
ABC/ABM of the procurement activities of ACME
Activities Cost of
resources
Cost driver Cost driver
amount
Cost driver
rate
Purchase
requisition
processing
$200,000 Number of
requisition
6,000 $33,33
Vendor
selection
$510,000 Number of
vendors
200 $2,550
Vendor
evaluation
$510,000 Number of
vendors
200 $2,550
Vendor
coordination
$615,000 Number of
vendors
200 $3,075
Materials
processing
$195,000 Number of PO
line items
7,500 $26
Warehouse $84,000 Number of PO
line items
7,500 $11,20
Invoice
processing
$50,000 Number of
invoice
5,000 $10
ACTIVITY Value
Ricevimento
ordine
si
Selezione
fornitori
si
Valutazione
fornitori
si
Coordinamento
fornitorI
si
Controllo
materiali
no
Magazzino no
Controllo
fatture
no
Activity Value Analysis
What kind of
activities create
value to
costumers?
On which strategic determinants can they act?
• SUPPLIER RELATIONSHIPS
yes
yes
yes
yes
Order
Receipt
Suppliers
selection
Suppliers
evaluation
Suppliers
coordination
Materials
control
Warehouse
Invoices
control
New relationships with suppliers affect the cost
driver and the business costs
• Number of suppliers
• Number of control over the
goods
• Number of orders
• Number of invoices
• Number of inspections on invoices
Consolidation of
relationships with a few
suppliers to increase
confidence;
Development of a supplier quality certification program to remove post-receipt controls
Do cumulative orders, and
not fragmented;
Implementation of corporate
credit card for small orders
REDISIGN PROCESS
TCO of corporate fleet
• “Low price” suppliers – Low list price – Front-end discounts
• “Low cost” suppliers – Price list is just the tip of the iceberg! – Low cost minimize the “total cost of ownership”
• How can we identify the TCO items?
TCO of corporate fleet
• Fleet’s life cycle
– Procurement requests process – Suppliers selection and delivery management – Financing capital investment – Operating activities – Maintenance and repair service
– Replacement and Remarketing The TCO can be calculated through an Activity based Costing approach.
The TCO considers both the cost items directly depending by activities (fuel, insurance, taxes, staff, etc.) and also the sale proceeds from the used market (cost reduction)
The value chain of the fleet
How to change the Fleet Manager in a strategic partner
1. Creating a vision
2. Communicating the vision
3. Using new methods of performance management
4. Planning and creating continuous performance improvements
5. Consolidating improvements
6.
Institutionalizing new approaches
TCO and residual values
• From the economic point of view, it’s necessary to distinguish
between purchase price, residual value and operating costs.
• The purchase price is a multi-year cost that goes to the balance sheet.
• The residual value is the difference between the original capitalised
cost and amortization fund at a certain date.
• The operating costs are costs that pass through the profit and
loss account:
– According to nature: depreciation of goods of property, financial
expense/rental-leasing fees; fuels, maintenance and repair, etc.
– According to assignment procedures: direct costs vs indirect costs
– According to costs behavior: variable costs, fixed costs, semi-fixed costs and semi-variable costs
– Ordinary and extraordinary components (gains and losses)
TCO and residual values
Historical price – Presumed Realizable Value
Service Life
Depreciation Rate
To calculate the rates by means of the depreciation plan, you should consider:
- the historical cost of asset acquisition, which also includes any additional
charges.
- - the presumed realizable value at the end of the asset’s life span.
- - depreciation, given by the difference between the historical value and the
presumed realizable value
- - asset’s service life, expressed in years or in months, is presumed on its life span and on its technical and economic utility. - - the criterion for the over time subdivision of the depreciation rates; there are several
criteria of subdivision (mathematical, straight line or declining balance methods;
elastic, according to business needs; economic, fixed from year to year according to
the possibility of the future use of the asset).
TCO management
• The TCO is determined by the costs of the
activities during the product life span:
Acquisition orders – suppliers selection –
contracts administration – operating
activities – maintenance and repair
services – realization of the residual
values.
To manage the TCO costs, it’s necessary
to manage the drivers of the activities
(ABC/ABM)
Fleet’s ABC/ABM
Acquisition orders Car policy
Suppliers selection Car list
Delivery Lead Time
Administration Number of brands/models Number of suppliers
Operating activities Number of km covered Vehicle type
Maintenance and repair services Downtime Term guarantees
Replacement and remarketing Cycle time Residual value
